What Is FICA and How Does It Impact Payroll Taxes?

FICA is a payroll tax that funds Social Security and Medicare, requiring contributions from both employers and employees. Employers must withhold, match, and submit FICA taxes while following IRS guidelines on deposit schedules, wage bases, and additional Medicare tax requirements.

By Brad Nakase, Attorney

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Table of Contents

1. What does FICA mean?

2. What is the FICA tax rate?

3. Instructions for submitting your FICA payroll tax

4. Exceptions from FICA taxes

5. FICA vs. taxes on self-employment

6. FICA limitations: Floors and caps on wages

7. Finding the amounts due for withholding and the employer’s share

8. Determine the amount of additional Medicare tax that must be withheld

9. The “mismatch” between the tax duties of the employee and those of the employer

What does FICA mean?

As a boss, it’s your job to pay your workers and deal with those annoying employment taxes. The FICA payroll tax is one of the many taxes that must be computed and withheld from employees’ paychecks. What exactly is the FICA tax?

Both employers and employees are required to pay FICA, a payroll tax. The FICA tax is a proportion of taxable wages rather than a flat rate like federal income tax. Social Security and Medicare are the two main components of this system of taxes. Half of the FICA percentage funds Medicare and half funds Social Security.

For those curious, “FICA” stands for the Federal Insurance Contributions Act. But how are Medicare and Social Security related to insurance?

The “insurance” tax category includes both Medicare and Social Security. All three types of insurance premiums—old-age, survivors, and disability—make up Social Security. Hospital insurance tax is a part of Medicare.

Employers provide funds for Social Security and Medicare when they collect FICA taxes from their workers and pay the employer portion. In the same way that any insurance program would pay out benefits to those who are eligible, these programs do the same.

What is the FICA tax rate?

Everybody pays 7.65% in FICA taxes; that’s for Social Security and Medicare. In other words, this percentage is applied to the taxable wages of every worker. The total amount of FICA tax received by the IRS from all employees is 15.3% of their wages.

At the end of each pay period, you deduct 7.65% of every employee’s salary. On top of that, you chip in 7.65% to cover the employer’s share.

Social Security receives 6.2% and Medicare receives 1.45% of this 7.65% FICA tax.

To better understand FICA tax, consider the following:

Worker: 1.45% Medicare / 6.2% Social Security

Company: 1.45% Medicare / 6.2% Social Security

That is to say, you are responsible for withholding 6.2% of your employees’ wages to cover Social Security taxes, and you also pay an additional 6.2% as an employer. The total amount you pay is 12.4%. You also pay your employer share of Medicare taxes, which is 1.45% of your employees’ wages plus an additional 1.45% (1.45 employee portion + 1.45% employer portion = 2.9 percent total). A total of 15.3% comes from the four parts: 6.2% from workers’ and employers’ Social Security contributions, 1.45% from Medicare employees and 1.45% from employers’ Medicare contributions.

The employee portion is the only one subject to the 0.9% Medicare surtax, in contrast to the other FICA taxes. The Medicare surtax, often known as the Additional Medicare Tax, does not have an employer match. You are responsible for withholding this 0.9% tax from employee wages; however, you are exempt from paying the employer’s share.

You only have to withhold the 0.9 percent Medicare surtax if the wages you pay a worker in a calendar year are more than $200,000. In the pay period when an employee’s wages go above this $200,000 “floor,” you start withholding the surtax; you keep withholding it every pay period until the calendar year ends.

1. Social Security

Once again, 6.2% of a worker’s taxable income goes toward Social Security. This rate gives money to people who are retired, disabled, or the families of workers who have died.

For example, suppose an employee receives $1,000 every pay period. A total of $62 ($1,000 X 0.062) goes toward paying Social Security taxes from that paycheck. For the employer portion, you also put $62 in.

There is a limit to the Social Security employer-employee tax. A wage base exists for Social Security. You should not withhold and contribute the 6.2% Social Security portion of FICA tax if an employee’s earnings are more than the wage base.

The base wage for 2025 is $176,100. Reimburse your employee or employees if you inadvertently withhold Social Security taxes from their paychecks beyond the wage base limit.

2. Medicare

Payroll taxes equal to 1.45% of an employee’s taxable income should be withheld and matched at the same rate. Medicare is a federal program that helps pay for medical expenses and end-of-life care.

If an employee earns $1,000 per pay period ($1,000 X 0.0145), $14.50 would be withheld for Medicare tax. For the employer portion that matches contributions, your contribution would be $14.50.

Medicare, in contrast to Social Security, does not have a salary base limit. Indeed, there is an extra Medicare tax. The employee’s filing status determines the wage for this additional amount:

Single: $200,000

Filing as a married couple: $250,000

Separate filings for married couples: $125,000

Wages over $200,000 are subject to an additional Medicare tax withholding requirement of 0.9%. You should deduct 2.35 percent (1.45% plus 0.9% of an employee’s salary) if their pay is liable for the extra Medicare tax.

There is no requirement that you match the extra Medicare tax. It is exclusively for workers. However, you are obligated to continue making payments equal to 1.45%.

Instructions for submitting your FICA payroll tax

Following the deduction of FICA tax from employee wages and the contribution of the employer portion, it is now time to send the information to the Internal Revenue Service.

Before your employment tax due dates—which vary by depositor type—come up, be sure to deposit and report the amounts. Businesses commonly deposit funds on a monthly or semiweekly basis.

The amount of taxes you owe over a four-quarter lookback period will determine when you are required to make deposits. Before the new year begins, decide on a deposit schedule for the coming year.

Pay both federal income taxes and FICA taxes. Use the EFTPS, or Electronic Federal Tax Payment System, to send in your payroll taxes to the IRS. A Full Service payroll will take care of the tax deposits for you.

Not only must you deposit FICA tax, but you are also required to report it on Form 941 or Form 944. How are Forms 941 and 944 different from one another? There is an annual form (944), and there is a quarterly form (941). Use Form 944 only when instructed to do so by the IRS.

Exceptions from FICA taxes

Most individuals are obligated to contribute to Medicare and Social Security. Withholding FICA tax is mandatory for most forms of compensation.

However, there are some situations in which workers’ salaries are not subject to FICA. A few cases are as follows:

Partner: Partner compensation, whether general or limited
Plans for retirement and pensions: Employer payments made to an eligible retirement plan
Statutory nonemployees: Salespeople who are not considered employees by law, such as qualified real estate agents and direct sellers
Students: In certain cases, schools may pay students who are enrolled in their programs and who demonstrate regular attendance and service to those institutions.
Tips: Monthly tip income below $20
Certain nonresident aliens: For an exhaustive rundown of all nonresident aliens who are tax-exempt, check with the Internal Revenue Service.

Refer to IRS Publication 15 for additional details regarding FICA tax exemption.

FICA vs. taxes on self-employment

In the absence of an incorporated business, you are responsible for paying self-employment tax on your wages rather than FICA tax. Similar to FICA, self-employment taxes consist of Medicare and Social Security taxes.

When you add up the amounts paid by both employers and employees to the total amount of FICA, you get the rate for self-employment taxes.

15.3% of your earnings will be subject to self-employment tax. Out of the total, 12.4% goes toward Social Security and 2.9% goes toward Medicare.

Similar to FICA, self-employment tax applies to both the Social Security wage base and the additional Medicare tax.

FICA limitations: Floors and caps on wages

There is a yearly inflation adjustment cap on the Social Security tax, which is also known as Old-Age, Survivors, and Disability Insurance (OASDI).

In spite of this, the 1.45% Medicare tax has no yearly cap. Furthermore, the 0.9% Medicare surtax is not subject to withholding unless an employee’s wages surpass $200,000.

1. Salary floor for Social Security

When you pay an employee a total of $160,200 in 2023, you are no longer obligated to withhold and pay their Social Security tax. (The sum is $147,000 for the year 2022.)

2. No wage cap for Medicare

No matter how much you pay an employee, you are still required to withhold and pay the Medicare tax because the 1.45% portion has no ceiling.

3. Minimum wage for additional Medicare tax

If an employee’s salary is more than $200,000 per year, you are required to withhold the 0.9% Medicare surtax. Medicare surtax withholding does not commence until the payroll period in which an employee’s wages surpass $200,000. No employer contribution is required. You deduct the 0.9% surtax from workers’ paychecks.

Example

Up until November 30, 2022, you paid your employee Travis $170,000. Travis will receive a bonus of $50,000 on December 1, 2022. Before December 1, you did not have to take out the Medicare tax surcharge. It is required that you withhold additional Medicare tax on $20,000 of the bonus amount of $50,000 beginning on December 1. The remaining $30,000 is exempt from Additional Medicare Tax withholding. Additionally, for any other wages that Travis receives in December 2022, you are required to deduct the additional 0.9% Medicare tax.

Finding the amounts due for withholding and the employer’s share

To find out how much you need to withhold and pay in Social Security and regular Medicare taxes, you just multiply an employee’s gross wage by the relevant tax rate.

An employee’s regular Medicare and Social Security taxes remain unchanged regardless of how many withholding exemptions they claimed for income tax withholding.

Determine the amount of additional Medicare tax that must be withheld

The employee is the only one subject to the 0.9% surcharge, in contrast to the 6.2% Social Security tax and the 1.45% Medicare tax. Surtaxes are withheld from employees’ paychecks, but employers are never obligated to match those withholdings.

When it comes to the Medicare surtax, the employer and employee have different responsibilities. There might be a “mismatch” between the amount of surtax your employee owes and the amount you’re required to withhold.

When an employee’s salary, compensation, or self-employment income exceeds a certain amount—which varies by filing status—the employee is subject to the 0.9% Medicare surtax. At that point, the tax is applied to all wages that are presently taxable under Medicare, the Railroad Retirement Tax Act, or the Self-Employment Contributions Act (“SECA”).

Employers are required to withhold the 0.9% Medicare surtax regardless of whether employees will actually be responsible for paying it or not. When an employee’s salary or compensation goes above $200,000 per year, you are required to start withholding the Medicare surtax. (This calculation takes into account taxable fringe benefits but ignores nontaxable ones.)

Withholding is mandatory only for sums above $200,000. Having said that, you are required to withhold the Medicare surtax from your paychecks beginning on the first of the year and continuing until the end of the calendar year.

You do not take into account the individual’s spouse’s income or wages paid by other employers when you make this determination. Once the employee’s income reaches the $200,000 withholding threshold, you are still required to withhold the additional tax, regardless of whether they are married or not. It doesn’t matter if the spouses work for the same company; the “ignore the spouse’s earnings” rule still applies.

Advice: Review the IRS Questions and Answers for the Additional Medicare Tax if your company has non-standard compensation arrangements such as tipped employees, taxable fringe benefits, multiple entities, or anything else.

The “mismatch” between the tax duties of the employee and those of the employer

There may be problems with over- or under-withholding due to the fact that each employer’s withholding is activated at $200,000 per employee, regardless of filing status or combined earnings.

1. Example of over-withholding tax

In the year 2022, your employee Henry will receive $220,000 from you. Although they are married, his wife is unemployed. When Henry’s income reaches $200,000, you are required to begin withholding the extra 0.9% Medicare tax. Since Richard and his wife’s combined income is less than the $250,000 threshold for married couples filing jointly, he will have an excessive amount withheld from his paycheck.

2. Example of under-withholding tax

Your employee Hyacinth will receive $130,000 from you in 2022. In 2022, Edward, who is married to Hyacinth, earns $100,000 from one job and $60,000 from another. When they file jointly, their combined income is $290,000—$40,000 more than the threshold for married couples. Since neither partner made more than $200,000 from a single job, their employers are exempt from withholding the 0.9% surtax.

The employee is responsible for paying the 0.9% Medicare surtax if the employer fails to do so. On Form W-4, employees have the option to request additional income tax withholding or make estimated payments if they believe they will be under-withheld for the Medicare surtax. Employees can claim the extra income tax as a Medicare surtax credit on their US Tax Return (Form 1040) or US Tax Return for Seniors (Form 1040-SR).

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What Is FICA and How Does It Impact Payroll Taxes?

What does FICA mean?

What is the FICA tax rate?

Instructions for submitting your FICA payroll tax

Exceptions from FICA taxes

FICA vs. taxes on self-employment

FICA limitations: Floors and caps on wages

Finding the amounts due for withholding and the employer’s share

Determine the amount of additional Medicare tax that must be withheld

The “mismatch” between the tax duties of the employee and those of the employer

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